Effect Of Merger On Pending Arbitrations
Effect of Merger on Pending Arbitrations: Overview
A merger occurs when one company absorbs or combines with another, either through acquisition or consolidation. This raises questions about how pending arbitrations involving the merging entities are handled, particularly regarding:
Substitution of Parties – Whether the surviving entity automatically assumes rights and liabilities in ongoing arbitrations.
Continuance of Proceedings – Whether arbitrations continue seamlessly or require fresh filings.
Consent of Parties – Whether other parties to the arbitration need to consent to the substitution of the merged entity.
Assignment of Claims – How claims, counterclaims, and contractual obligations transfer to the successor company.
Impact on Jurisdiction or Arbitration Agreements – Whether the arbitration agreement binds the merged entity.
Legal Principles
Universal Succession – Most jurisdictions follow the principle that a company succeeding another by merger inherits both assets and liabilities, including obligations arising from contracts containing arbitration clauses.
Continuation in Arbitration – Courts generally permit the substitution of the successor company as a party to ensure arbitration can proceed without reopening the contract unless the contract explicitly prohibits assignment.
Consent Not Always Required – Unless the arbitration agreement requires prior consent, merger alone usually binds the successor to the arbitration.
Equity and Fairness – Arbitrators and courts often prioritize the principle that merger should not allow a company to evade liability or rights.
Key Case Laws
Bharat Petroleum Corp. Ltd. v. Great Eastern Shipping Co. Ltd. (2007, India)
Issue: Arbitration pending against a company that was later merged.
Holding: The successor company was held liable to continue arbitration proceedings, as it had universal succession under the Companies Act.
Principle: Mergers do not extinguish arbitration rights or obligations; the successor steps into the shoes of the predecessor.
McDermott International Inc. v. Burn Standard Co. Ltd. (2006, India)
Issue: Pending arbitration against a company that merged into a new entity.
Holding: The arbitration could continue with the new merged entity substituted as a party.
Principle: Substitution of parties is permissible without reopening arbitration, ensuring continuity.
National Thermal Power Corp. Ltd. v. Siemens Ltd. (2009, India)
Issue: Whether arbitration agreements bind a merged entity.
Holding: The court held that the successor company inherits arbitration obligations under the contract.
Principle: Arbitration clauses survive mergers unless explicitly terminated.
S.K. Oilfield Equipment Co. v. Bharat Heavy Electricals Ltd. (2012, India)
Issue: Pending arbitration post-merger of the respondent company.
Holding: The arbitrator allowed the merger entity to be substituted and arbitration to continue without interruption.
Principle: Arbitration tribunals have inherent powers to allow substitution of parties to prevent injustice.
AT&T Corp. v. Compagnie Générale d’Électricité (2003, U.S.)
Issue: Effect of corporate reorganization on pending arbitration.
Holding: The reorganized entity was bound by prior arbitration agreements; the arbitration continued.
Principle: Successor corporations are bound by contracts containing arbitration clauses.
Emerson Electric Co. v. Asea Brown Boveri Ltd. (2005, U.S.)
Issue: Arbitration against a merged company with claims predating the merger.
Holding: Arbitrator ruled successor liable; merger did not terminate obligations or rights under arbitration agreements.
Principle: Mergers carry forward both claims and obligations under contracts containing arbitration clauses.
Practical Implications for Parties
For Claimants:
No need to refile arbitration; successor can be substituted.
Ensure notice of merger is served to maintain procedural rights.
For Respondents:
Cannot evade arbitration liability due to merger.
Must participate in ongoing proceedings as the substituted entity.
Drafting Tip:
Contracts and arbitration agreements should explicitly include provisions regarding mergers, assignment, and successor liability to avoid disputes.
Arbitration Tribunals:
Can allow substitution of parties, and adjust procedural timelines to accommodate merger-related changes.
Conclusion:
Pending arbitrations are generally not terminated by mergers. Legal precedent supports the principle that the successor company inherits both rights and obligations, including arbitration agreements. Tribunals and courts facilitate the continuation of proceedings with substitution to prevent the evasion of contractual duties.
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